Picture: ISTOCK
Picture: ISTOCK

Fighting corruption in the public sector will constrain economic growth in the medium term, analysts say.

This is because the private sector will take on much of the cost through higher taxes as government spending is cut and public sector employment and wages slow.

President Cyril Ramaphosa has vowed to tackle the scourge of corruption and state capture rampant under former president Jacob Zuma.

Nedbank senior economist Nicky Weimar said tackling corruption and the inflated public sector wage bill would negatively affect growth.

Click to enlarge
Click to enlarge

"The public sector has become too big for the size of this economy," she said at the Nedgroup Investments Summit in Sandton on Thursday.

She added that the public sector had outstripped the private sector, but this had driven consumer spending.

"Short term, it inflicts a lot of costs that will hurt the economy. While it pays off in the long run, it will keep economic growth subdued," she said.

Over the medium term, growth would be slow and driven by cyclical forces such as the upswing in the global economy and favourable inflation.

Progress on tackling the public sector would only happen after the 2019 general election. "Structural reform will remain a challenge … you can expect the consumer to carry the economy over the next few years," she said.

Surprisingly low growth had resulted in many institutions revising down their growth forecasts. While the Reserve Bank did not expect a recession, Weimar said there was a high possibility the domestic economy would see another contraction. The economy saw a contraction of 2.2% in the first quarter, with exceptionally poor performances in agriculture, mining and manufacturing.

Old Mutual Investment Group MD Khaya Gobodo said on Wednesday Ramaphosa needed to fully commit to fighting corruption to send clarity to markets, even if it was a costly decision.

"Policy certainty and clarity which will raise business confidence is the silver bullet for this economy," he said.

On Monday, the IMF said in a country diagnosis that South African authorities should deepen the fight against corruption and change its labour and product markets as some of the nation’s post-apartheid achievements had "recently unwound" amid slow economic growth.

The fund’s directors recommended "the forceful application of the Public Finance Management Act to increase deterrence against corruption".

Correction: August 06, 2018

An earlier version of this article referred to Khaya Gobodo as Old Mutual Group MD. Gobodo is managing director of Old Mutual Investment Group. 

menons@businesslive.co.za

Please sign in or register to comment.